Sec to Open Investigation Into American Realty Capital Properties’

Robbie Whelan, Craig Karmin and Jean Eaglesham reported that the Securities and Exchange Commission is planning to open an investigation into American Realty Capital Properties Inc.’s accounting, according to sources. American Realty’s shares plunged earlier in the day after the company revealed that two of its top executives had resigned and there were inaccuracies with the company’s financial statements.

The story as it appeared on Dow Jones:
Oct. 29, 2014, 2:05 PM EDT: SEC To Open Inquiry Into American Realty Capital Properties’ Accounting – Source

2:05 PM EDT: American Realty Capital Said Two Top Executives Resigned, Financial Statements Can’t Be Relied On

2:47 PM EDT: SEC to Open Investigation Into American Realty Capital Properties’ Accounting

By Robbie Whelan, Craig Karmin and Jean Eaglesham

The Securities and Exchange Commission plans to open an inquiry into American Realty Capital Properties Inc.’s accounting, according to a person familiar with the matter.

The real-estate investment trust said two top executives have resigned and its financial statements dating back to 2013 couldn’t be relied upon.

The company revealed in a regulatory filing that it had overstated its adjusted funds from operations, an accounting measure, by $12 million for the first three months of 2014 and by about $10.9 million for the three months ending June 30, 2014.

It added that some inaccuracies were the result of intentional errors and some intentionally weren’t corrected. Chief Financial Officer Brian Block and Chief Accounting Officer Lisa McAlister have stepped down, according to the filing.

American Realty’s shares plunged 29.2% in early afternoon trading.

Several other entities controlled by American Realty Chairman Nicholas Schorsch suffered declines as well. RCS Capital Corp. had fallen almost 17% in afternoon trading, while New York REIT Inc. shed 4% and American Realty Capital Healthcare Trust Inc. was down 1.5%.

American Realty Capital’s audit committee launched an investigation after learning of the concerns on Sept. 7, and received preliminary findings on Oct. 24. AFFO is a measure of REIT performance that shows a trust’s net income, including write-downs, depreciation, and amortization, but not including profits or losses from the sale of property.

“The accounting issues are unacceptable and we are taking the personnel and other actions necessary to ensure that this does not happen again,” said David S. Kay, American Realty’s chief executive, in a statement. The company declined to comment further.

American Realty, which began life as a nontraded REIT founded by Mr. Schorsch, was listed on the Nasdaq Stock Market in 2011 and has expanded rapidly since, buying many of its largest competitors in the so-called net-leased real-estate industry, which consists primarily of properties occupied by asingle corporate tenant.

The company last October announced its biggest deal yet, a $7.3 billion acquisition of rival Cole Real Estate Investments Inc. In July it completed a $1.5 billion purchase of the Red Lobster restaurant chain’s real estate portfolio as part of a buyout of the eatery.

American Realty Capital has had accounting problems before. In June, after the Red Lobster deal was announced, hedge fund firm Marcato Capital Management LP, one of the REIT’s largest shareholders, sent a letter to American Realty Capital’s board criticizing two numerical errors related to the deal in investor disclosures.

In one instance, American Realty Capital reported an inaccurate share count to investors in its first quarter 2014 financial statements, Marcato said. The company later corrected the share count in a filing. Later, a prospectus filed by American Realty Capital stated that fees associated with the Red Lobster deal were $108 million; the company said in a later filing that the fees were actually $10.8 million.

“We believe the existence of these errors is symptomatic of the larger problem: The Company is engaging in too many transformative transactions too quickly,” Marcato wrote at the time. According to two people familiar with the matter, several large shareholders held Mr. Block, then the CFO, personally responsible for the errors.

Investors also are worried that the timing of the accounting revelations could imperil a deal that American Realty Capital announced earlier this month, according to a person familiar with the matter. On Oct. 1 the company said it would sell its private capital management business, Cole Capital, which raises money for nontraded REITs, for $700 million to RCS Capital Corp., another company chaired by Mr. Schorsch.

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